Material Cost Interview Preparation Guide

ABC analysis means ‘Always Better Control’ is a technique which classifies the various items of inventory according to their importance. It is an analytical method of inventory control which concentrates on the most significant inventory items. For example: A class consists of those items which are less in number but most important in nature. B class consists relatively less important items. C class consists of large number of items which are less important.

The importance of various items is decided on the basis of following factors:

-Critical nature of inventory
-Amount of investment
-Value of material consumed.

Bill of materials - is the list of all materials including all the details and quantity as required for a job or production process. This is prepared by the production department as soon as the order for the job is received. This also ensures proper inventory control. It gives an indication to the purchase department about the materials to be purchased if there is any shortage of material in the stores. A bill of material prepared in advance serves a base for quoting the price of the job.

a.) Re-order level = Maximum Lead Time x Minimum Lead Time

b.) Maximum level = Reorder Level + Reorder Quantity – (Minimum Usage x Minimum Lead Time)

c.) Minimum level = Reorder Level – (Normal Usage x Normal Lead Time)

d.) Danger level = Maximum Level x Lead time for Emergency purchases

The techniques of inventory control are:

-Economic Order Quantity
-Fixation of Inventory Levels
-Maximum Level
-Minimum Level
-Average Level
-Re-order Level
-Danger Level

Perpetual inventory system - is a system under which continuous stocking takes place. This system is implemented by the large manufacturing units. It aims at maintaining bin cards and stores ledgers to know the quantity and value of the stock at any point of time which ensures that the physical balance and the book balance tallies. By systematically maintaining perpetual inventory system discrepancies can be easily located and can be adjusted in time. It also enable in locating slow and non-moving items and to take action for the same.

Fixation of inventory levels facilitates easy maintenance and control of various materials in a proper way. However, following points should be remembered: Only fixation of inventory levels does not facilitate inventory control. A constant watch on the actual stock level of materials should be kept so that proper action can be taken in time The levels which are fixed are not for permanent basis and are subject to regular revision.

This is the top level which indicates that level of material stock should not exceed this level. If it does, it may involve blocking of funds in inventory which may be used for some other useful purposes. This level is fixed after considering following factors:

-Maximum Usage
-Lead Time
-Storage facilities available
-Prices of material
-Other various costs involved like insurance, storage cost etc.
-Availability of funds for procurement of materials
-Nature of material
- EOQ

This level is fixed below the re-order level but above the danger level. The level of stock should not be reduced below this level. If it does, then it involves the risk of non availability of material whenever required. This level is fixed after considering two factors: Rate of Consumption and Lead Time.

This level is fixed between maximum and minimum level in such a way that the requirement of materials for the production can be met properly till the fresh supply of material is received. This level of material stock indicates that steps should be taken for procurement of further lots of material.